Civilizing Society

By Williamson, Claudia R. | Journal of Private Enterprise, Fall 2011 | Go to article overview

Civilizing Society


Williamson, Claudia R., Journal of Private Enterprise


I. Introduction

The link between economic institutions, such as well-defined and secure property rights and the rule of law, and economic development is well documented in the literature (Montesquieu, 1748; Smith, 1776; Demsetz, 1967; Hayek, 1960; Bauer, 2000, North, 1990, 2005; Keefer and Knack, 1997; Rodrik et al, 2004; Acemoglu and Johnson, 2005). North (1990, 2005) argues that institutions provide the rules of the game that structure political, economic, and social interaction. These constraints provide the incentives and information to facilitate production and exchange, investment, technological innovation, and entrepreneurship that are necessary for economic development. The empirical research supports this positive causal relationship between the institutions supporting economic freedom and prosperity (Gwartney et al.,1999; Acemoglu et al., 2001, 2002; Cole, 2003). Rodrik et al. (2004) summarize this robust finding as "Institutions Rule."

More recently, economists have been pinpointing specific institutions that are important for economic development. An outgrowth of this research is to separate institutions into their formal (government provided and enforced) and their informal (privately provided and enforced) components. An emerging result supports the importance of informal constraints in promoting economic development through its effectiveness in defining and enforcing rules that promote secure property rights, exchange, and the observance of contracts (Anderson and Hill, 1979; Benson, 1989a, 1989b; Greif, 1993; Greif et al., 1994; Stringham, 2002, 2003; Nenova and Hartford, 2004; Acemoglu and Johnson, 2005; Leeson, 2007a,b; Tabellini, 2007; Williamson, 2009). These constraints stem from social norms, culture, customs, and traditions. Thus, a society's virtues are at the core of any institutional arrangement and the subsequent incentive and information structure that is formed to guide social and economic behavior.

This paper attempts to understand more specifically the influence that virtues exhibit on economic development. My conjecture is that virtues promote social cooperation by reducing transaction costs and the costs of monitoring, generating commonalities and focal points, and creating broad rules to guide behavior leading to more economic exchange and production, higher investment, and more entrepreneurship. These interactions form the core or "institutional glue" necessary for the economic institutions supporting a free and prosperous society to be effective.1

My approach is twofold. I focus on addressing two important questions. First, which virtues promote economic freedom and development? Second, can we identify determinants of these specific virtues? To answer these questions, I rely on analysis provided in the economics literature including theoretical, conceptual, and empirical studies. My analysis is a natural extension of the institutional literature and centers on understanding how virtues help to form the necessary constraints that promote economic freedom and development.

Instead of focusing on traditional virtues such as justice, prudence, and love, as discussed by McCloskey (2006), for example, my analysis attempts to complement such studies by centering on virtues directly supporting economic exchange and production, entrepreneurial activities, and the provision of public goods. The three main virtues identified in the literature that are expected to encourage and support market activity are trustworthiness, respect, and individualism.

Section 2 provides an overview of each virtue in detail, explaining how these virtues affect and promote economic exchange and production and thus provide the foundation for freedom. Section 3 explores the second question and attempts to explain possible sources of values, beliefs, and culture. This section addresses several possible explanations in the current literature with particular emphasis on two main sources. Formal institutions and government behavior could determine and affect a society's virtues. …

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